Prime-2 short-term ratings confirmed; BFSR downgraded to E from E+
Paris, April 18, 2012 -- Moody's Investors Service has today downgraded by one notch to Baa2
with a negative outlook from Baa1 on review for downgrade the long-term
senior debt and deposit ratings of Dexia Credit Local (DCL). The
Prime-2 short-term rating has been confirmed. The
downgrade of the long-term senior debt and deposit ratings to Baa2
directly follows Moody's downgrade of DCL's standalone bank
financial strength rating (BFSR) to E -- mapping to caa1
on the long-term scale -- from E+/b2.
The downgrades of the BFSR -- and thus the long-term
senior debt ratings -- were triggered by Moody's view
that DCL, under its post-restructuring form, will likely
continue to operate under significant stress. The rating agency
assumes that the European Commission (EC) will approve all restructuring
and support measures currently in progress, and that the measures
will be executed on time. The long-term ratings continue
to benefit from a very high degree of systemic support.
DCL's subordinated debt rating of B3 remains on review for downgrade.
This reflects the rising risk that government support for this type of
debt might not be available in the future (please see "Moody's reviews
European banks' subordinated, junior and Tier 3 debt for downgrade"
published on 29 November 2011).
These rating actions conclude the review for downgrade of DCL's
long and short-term senior ratings and BFSR, initiated on
3 October 2011.
RATINGS RATIONALE
BFSR DOWNGRADE REFLECTS DCL's EXPECTED RUN-OFF PROFILE
The downgrade of DCL's BFSR to E (mapping to a caa1 standalone credit
strength) reflects Moody's view that the entity, under its
post-restructuring form, will be almost entirely managed
in a run-off mode, and that its current and future viability
as a run-off structure strongly relies on external support.
Moody's assumes that DCL will, as the residual entity (i)
continue to hold the assets left after the planned disposals of the active
franchises of Dexia Group; and (ii) manage these assets either in
run-off, or with minimal production necessary to meet the
residual commitments until the assets can be sold. The rating agency
also assumes DCL will remain a credit institution, subject to regulatory
oversight.
Since the announcement of its dismantling in October 2011, Dexia
Group has continued to operate thanks to the liquidity assistance of central
banks and the state-guaranteed debt programme that was implemented
in December 2011 on a temporary basis with a ceiling of EUR45 billion.
The rating agency also believes that the contemplated replacement of this
temporary state-guaranteed debt programme by a EUR90 billion long-term
definitive scheme -- subject to the EC's approval
of the group's restructuring plan submitted on 21 March 2012 --
will be essential to ensure the residual entities' sustainability.
Nevertheless, assuming the definitive guarantee plan is implemented
smoothly and in a timely manner, DCL's operations will remain
under significant stress, notably due to the low margin of its assets.
In Moody's view, DCL's reliance on short-term
financing is likely to remain high as the cost of long-term state-guaranteed
debt is expected to be significantly higher than the yield of the assets
in the current spread environment.
SENIOR DEBT RATINGS UNDERPINNED BY VERY HIGH PROBABILITY OF SYSTEMIC SUPPORT
The downgrade of DCL's long-term debt and deposit ratings to Baa2
directly follows the downgrade of its standalone BFSR. At the same
time, the ratings continue to benefit from Moody's assessment of
a very high probability of systemic support. At Baa2, the
fully supported senior debt ratings continue to include eight notches
of support uplift from the caa1 standalone credit strength.
Moody's continues to recognise and incorporate into DCL's
senior ratings very strong systemic support from the Belgian, French
and Luxembourg governments. The rating agency considers that because
of the Belgian, French and Luxembourg governments' substantial
unsecured exposures to DCL -- through the outstanding state-guaranteed
debt under both the 2009 and December 2011 support programs --
there is a strong incentive for them to further support the entity both
in terms of liquidity and capital in the case of need.
The negative outlook reflects the uncertainties related to the EC's
approval of the definitive guarantee scheme and the transition risks until
all the announced measures are implemented.
WHAT COULD MOVE THE RATINGS UP/DOWN
The outlook on the E BFSR is stable. However, the E BFSR
could be remapped to a lower level from the current caa1 if (i) further
pressure is exerted on DCL's financial position through the timing
and terms of the definitive guarantee scheme; or (ii) DCL experiences
higher-than-expected losses that materially affect its solvency.
A lower remapping within the caa category could have an effect on the
long-term ratings. Moody's also notes that there is
potential for more extensive rating migration if (i) the probability of
government support declines; or (ii) the governments providing their
guarantees under the support schemes experience downward rating migration.
Upward ratings pressure is very limited given the very high support assumptions
already factored into DCL's long-terms ratings and could
only be achieved through a multi-notch upgrade of the BFSR.
This, in turn, would be subject to a full restoration of DCL
as an independently operating going concern entity with an overall satisfactory
risk profile. However, Moody's considers this scenario
as unlikely.
PRINCIPAL METHODOLOGIES
The methodologies used in these ratings were Bank Financial Strength Ratings:
Global Methodology published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: Global
Methodology published in March 2012. Please see the Credit Policy
page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
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agent(s) and issued with no amendment resulting from that disclosure.
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parties involved in the ratings, public information, and confidential
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Yasuko Nakamura
Vice President - Senior Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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Carola Schuler
MD - Banking
Financial Institutions Group
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Releasing Office:
Moody's France SAS
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Moody's downgrades Dexia Credit Local to Baa2; outlook negative
